Cooperative Extension
Volume 7, Number 1, Statewide
1999 Cotton Management Economic Notes
February 10, 1999
The University of Arizona • College of Agriculture • Tucson, Arizona, 85721
Department of Agricultural and Resource Economics
Russell Tronstad and Alan Ker
Extension Economist and Assistant Professor
Crop Insurance: Your Most Profitable Input?
On January 8, 1999 Agriculture Secretary Dan
Glickman announced an estimated 30% premium reduction for producers from previous premium rates that were
also subsidized. This reduction plus the newly available
Crop Revenue Coverage (CRC), which has benefits if
prices increase at harvest, means that everyone should
probably change their current policy before the sales
closing date of February 28, 1999. Contact your local
Farm Service Agency for their most current list of sales
agents available for your area. In short, some have described the situation as “freedom to farm has become
freedom to insure.”
It now appears that the crop insurance program has
become the cornerstone of the U.S. agricultural policy
agenda. One need only consider the following statements
made by U.S. Secretary of Agriculture Dan Glickman
during a radio address of December 28, 1998:
“Of course, this past year was about more than crisis
management. We expanded crop insurance and experimented with innovative kinds of coverage, such as wholefarm coverage. It’s no secret that I want 1999 to be the
Recent Prices
Spot - uncompressed
Mar '99 Futures
Oct '99 Futures
Dec '99 Futures
Adj. World Price
February 10, 1999
Upland Pima (ELS)
(¢/lb)
(¢/lb)
54.10
58.10
60.15
60.50
42.39
90.75
Note: Upland Spot for Desert SW grade 31-3, staple 35, add 300 points for
compressed bales, Pima Spot for DSW grade 03, staple 46, 1/28/99.
‘year of the safety net’ ... a year in
which we build a strong risk management system anchored in a strengthened crop insurance program.”
Narrow Sign-Up Window for Good Odds
The sales closing date for Arizona cotton is February
28, but the base price is determined using December 1999
NYCE Futures for the period of January 15 through
February 14 – resulting in a narrow window. On average,
crop insurance has been a fairly good bet when averaging
over all crops and regions across the State. The accompanying table shows that for all policies in Arizona, producers have on average received a return of $1.59 to $3.59 for
every dollar they have spent on premiums in the last four
years. For Arizona cotton policies over this period the
return has ranged from $1.78 to $3.37 for each dollar spent.
However, as to be expected with “insurance,” not every
kind of policy, producer, or county has always reaped such
good returns. For example, ELS cotton policies did not pay
any indemnities for Maricopa in 1997 and 1998.
Historical Payout for Each $1.00 of
Producer Premium & SignUp Costs
1995
AZ: All Crops
$3.59
AZ Cotton
$3.37
Maricopa County
CAT: Upland
BuyUp: Upland
CRC Pilot: Upland
CAT: ELS
BuyUp: ELS
Pinal County
CAT: Upland
BuyUp: Upland
CAT: ELS
BuyUp: ELS
1996
$1.99
$2.19
1997
$3.04
$2.78
1998
$1.59
$1.78
$0.00
$3.19
$4.39
$0.00
$0.00
$0.00
$3.45
$0.00
$0.00
$0.00
$0.00
$2.30
$0.00
$0.47
$0.00
$0.77
$2.65
$3.69
Issued in furtherance of Cooperative Extension work, acts of May 8 and June 30, 1914, in cooperation with the U. S. Department of Agriculture, James A.
Christenson, Director, Cooperative Extension, College of Agriculture, The University of Arizona.
The University of Arizona College of Agriculture is an equal opportunity employer authorized to provide research, educational information and other services only to
individuals and institutions that function without regard to sex, race, religion, color, national origin, age, Vietnam Era Veteran's status, or disability.
The Table to the right illustrates
the impact of the planned 30% reduction in producer premiums and
indemnities under different yield and
price scenarios for Actual Production History (APH) and CRC policies. The example assumes an approved APH yield of 1,300 lbs. / acre
in Maricopa County and a base price
of 64¢/lb. Given recent price declines, this price could move lower.
Although the planting base price for
both APH and CRC should be close,
they will not necessarily be equal as
in the example. Note that APH policies only pay if actual yield falls
below the insured yield. For example, the column of 50/100 (50%
yield and 100% price protection) indicates that yield must fall below
50% of the approved yield before
any payments can be made on yield
less than 50% at the rate of 100% of
the base price. CRC is based on a
revenue guarantee (APH yield x Coverage Level x higher of Base Price or
Harvest Price x Price Share) rather
than just yield so that the 40% yield
combined with a 20% price reduction triggers an indemnity payment
of $17/acre for the CRC 50/100 insurance option.
Actual Production History(APH) and Crop Revenue Coverage
(CRC) Comparison for an Acre of Upland in Maricopa County1
Yield/Price Coverage
APH
Total Premium
Grower Premium
Govt. Subsidy
50/55
50/100
$7.55
$60 Fee2
$7.55
$13.73
$6.18
$7.55
Grower Premium
Govt. Subsidy
$60 Fee2
$7.55
$4.32
$9.40
CRC
Total Premium
Planned Grower Premium
Planned Govt. Subsidy
----------
$16.66
$9.22
$7.44
Grower Premium
Govt. Subsidy
-------
65/100
75/100
Planned Rates
$24.88
$14.50
$10.37
$43.68
$33.42
$10.26
30% Producer Discount
$10.15
$14.72
$23.39
$20.29
Planned Rates
$31.99
$21.61
$10.37
$57.21
$45.37
$11.84
30% Producer Discount
$6.45
$10.21
$15.13
$16.88
$31.76
$25.45
Payout with a 40% Yield Shortfall and 20% Price Decline
Liability Coverage
APH Indemnity
$229
$0
$416
$0
$541
$42
$624
$125
Revenue Guarantee
CRC Indemnity
-------
$416
$17
$541
$141
$624
$225
Payout with a 40% Yield Shortfall and 25% Price Increase
Liability Coverage
APH Indemnity
$229
$0
$416
$0
$541
$42
$624
$125
Revenue Guarantee
CRC Indemnity
-------
$520
$0
$676
$52
$780
$156
1
All scenarios and policies assume an approved APH yield of 1,300 lbs. in Maricopa County and
a base price of 64¢/lb. Actual numbers for your farm will vary from this illustrative example.
2
Other than a signup fee, the entire premium for a farm-commodity is subsidized.
CRC pays the higher of the planting base price or
harvest price so that insured yield losses are paid at a higher
rate for CRC than APH when prices increase. For example, the indemnity payout of the 65/100 column for a
40% yield reduction combined with a 25% price increase
results in a 25% greater payment for CRC than APH (i.e.,
$42/acre payment for APH compared to the $52/acre
payment for CRC).
Note that total government subsidies were pretty much
maxed for yields insured beyond 60% prior to the 30%
reduction. But now total government premium subsidies
continue to climb as yield and price insurance levels
increase. However, this reduction could entice so many
“upgrades” and new policies that the final percentage
premium discount will be reduced below 30%.
Direction of Crop Insurance
In response to increased political pressure, new insurance products like CRC have become an important part of
the farm policy landscape. Other revenue insurance
programs have or are being developed. For example, a
new pilot program which will guarantee revenues on the
basis of Schedule F tax return information over the preceding 5 years will be implemented in 1999 for Florida,
Maine, Massachusetts, Michigan, and New Hampshire.
Independent of the particular crop insurance program
under development, as long as the political climate remains focused on unrealistic participation rates and subsequently attempting to attain those by continually increasing subsidies, government backed crop insurance
programs will represent an increasingly good “bet” for
producers.
Disclaimer: Neither the issuing individuals, originating unit, Arizona Cooperative Extension, nor the Arizona Board of Regents warrant or guarantee
the use or results of this publication issued by the Arizona Cooperative Extension and its cooperating Departments and Offices.